Management of Bank of Finland’s financial risks in 2023
Implementing monetary policy and safeguarding the stability and viability of the financial system are core central bank tasks. They involve financial risks, for which the Bank of Finland prepares by ensuring the strength of its balance sheet. At the end of 2024, the Bank of Finland’s total risks and risk buffers were near the year-end levels of the previous year.
In brief
The Bank of Finland’s capital adequacy is sufficient to cover the risks arising from the performance of its tasks.
The volume of the Bank of Finland’s monetary policy assets decreased as a result of bonds maturing and loan repayments.
The Bank of Finland’s net interest income was negative because of the high interest expenses it paid on central bank deposits.
Risks arise in Bank of Finland’s investment activities and in monetary policy implementation
At the end of 2024, the Bank of Finland’s financial assets amounted to approximately EUR 15 billion. These consisted of gold holdings, foreign reserves and long-term investments, which included fixed income investments, equity and real estate fund investments, and cash.
The Bank’s financial assets do not include items connected with the implementation of monetary policy, such as monetary policy loans to banks or securities acquired in monetary policy operations.
Foreign reserves include liquid fixed income investments. The size of the Bank’s foreign reserves has been scaled to the level required for performing the functions of a central bank.
A significant proportion of the Bank of Finland’s financial assets are debt securities purchased for monetary policy purposes and claims on banks resulting from monetary policy implementation. The Eurosystem’s monetary policy measures are implemented on a decentralised basis among the different Member States and the ECB, but the risks and returns are largely shared among the national central banks.
The risk relating to monetary policy assets corresponds, in principle, to each national central bank’s capital key share of the aggregate monetary policy assets of the national central banks. At the end of 2024, the Bank of Finland’s share was 1.816%.
However, the risks associated with government debt instruments and government-related debt instruments purchased under the public sector purchase programme (PSPP) and the pandemic emergency purchase programme (PEPP) are borne individually by each national central bank involved.
Volume of Bank of Finland’s monetary policy assets continued to decrease in 2024
The volume of the Eurosystem’s monetary policy assets decreased in 2024 by around EUR 0.8 trillion and was approximately EUR 4.3 trillion at the end of the year. The decrease was due to the repayments of targeted longer-term refinancing operations (TLTROs) and the maturing of securities acquired under monetary policy purchase programmes.
The asset purchase programme (APP) was in the run-off phase and no further purchases were made under it in 2024. Reinvestments under the PEPP continued until the end of 2024, but in the second half of the year these reinvestments were only partial.
The Bank of Finland’s share of monetary policy assets declined by about EUR 13 billion and was approximately EUR 72 billion at the end of the year.
| Bank of Finland’s financial assets and share of monetary policy assets | 31 Dec 2024EUR million | 31 Dec 2023EUR million |
| Financial assets | 15,446 | 13,421 |
| Gold | 3,532 | 2,945 |
| Foreign reserves | 8,488 | 6,923 |
| Euro-denominated fixed income investments1 | -62 | 0 |
| Long-term investments | 3,488 | 3,553 |
| Long-term interest rate investments | 494 | 493 |
| Equity fund investments | 1,330 | 1,281 |
| Real estate fund investments | 162 | 172 |
| Cash | 1,503 | 1,607 |
| Share of monetary policy assets | 72,499 | 85,674 |
| Refinancing operations | 622 | 7,476 |
| Targeted longer-term refinancing operations2 | 0 | 7,147 |
| Other refinancing operations2 | 622 | 328 |
| Debt instruments under the asset purchase programme | 45,901 | 50,537 |
| Finnish government bonds and government-related bonds | 32,300 | 35,208 |
| Bonds of supranational institutions2 | 4,138 | 4,651 |
| Covered bonds2 | 4,225 | 4,776 |
| Corporate bonds2 | 5,238 | 5,902 |
| Debt instruments under the pandemic emergency purchase programme3 | 25,957 | 27,627 |
| Securities markets programme2 | 19 | 35 |
| Total | 87,945 | 99,095 |
| 1) Entry is negative due to the inclusion of foreign exchange forward contracts.2) Capital key share (1.816% as of 1 Jan 2024) of aggregate claims by national central banks.3) In the case of the pandemic emergency purchasing programme the table shows the amount on the Bank of Finland’s balance sheet. | ||
In addition to the claims listed in Table 10, the Bank of Finland’s assets included EUR 27 billion in intra-Eurosystem claims, consisting mainly of the T2 balance. At the end of 2024, the Bank of Finland’s balance sheet total was EUR 130 billion.
Bank of Finland manages its risks through diversification
The Bank of Finland’s financial risks consist of market, credit and liquidity risks. Market risk refers to the possibility of financial loss as a result of variation in, for example, exchange rates, interest rates and share prices.
Exchange rate risk is the source of most volatility in the value of the financial assets. The Bank of Finland diversifies its exchange rate risk by investing in the US dollar, the pound sterling and the Japanese yen. The exchange rate risk is also diversified through investment in the Chinese yuan, since the Bank of Finland has receivables from the International Monetary Fund (IMF).
The strategic allocation of investments is determined by means of a benchmark index. This index, together with a highly detailed limits framework, acts as a guide to taking on interest rate and credit risks. In this way, the Bank ensures that the investments are highly liquid and are adequately diversified across various asset classes, countries, maturities and issuers. The Bank’s investment focus is on debt securities with high credit ratings.
The Bank of Finland’s financial assets also include some investments in the international equity and real estate markets. The investments are made through funds and diversify the other risks on the Bank’s balance sheet.
In the implementation of monetary policy purchase programmes, the Bank of Finland, in the same way as the other central banks, complies with the Eurosystem eligibility criteria and other risk-management rules.
The Bank of Finland manages its financial assets in a responsible manner. The Bank applies sustainability criteria to delimit its direct fixed income investments. Assessments of the responsibility and reliability of service providers are also emphasized in the Bank’s indirect investment activities.
Structural interest rate risk on the Bank of Finland’s balance sheet
The liquidity created via purchase programmes and refinancing operations is reflected on the liabilities side of the Bank of Finland’s balance sheet as central bank deposits.
The Eurosystem sets, on monetary policy grounds, the interest rate payable on the central bank deposits made by commercial banks. The interest rate decision has an immediate effect on the Bank of Finland’s interest expenses. Monetary policy assets, however, mainly carry a fixed interest rate. Thus, an increase in the deposit rate weakens the Bank’s net interest income. This difference in the interest rates applied to assets and liabilities on the Bank of Finland’s balance sheet poses a structural interest rate risk for the balance sheet.
For a long time, the Bank of Finland’s purchases of fixed-rate bonds in connection with monetary policy implementation were made at a low yield level. In the second half of 2022, the Eurosystem’s policy interest rates were raised, and the rate increases continued during 2023. This meant that the interest rate on central bank deposits also rose, which had a significant negative impact on net interest income.
As a consequence of this financing cost, the Bank of Finland’s operating profit remained negative in 2024. Based on the interest rate expectations prevailing at the end of 2024, interest rates are on a downward trend. Nevertheless, the Bank’s operating profit is expected to remain negative in 2025. As interest rates fall, it will gradually improve.
The structural interest rate risk position will decrease as the fixed-rate bonds acquired for monetary policy purposes mature.
Bank of Finland’s year-end total risks near previous year’s level
The Bank of Finland’s risks were reduced due to the maturing of monetary policy assets during the year, but risks were increased due to the increase in the holdings of foreign reserves in the last quarter of the year. Since these effects largely cancelled each other out, the total risk exposure at the end of 2024 was near the year-end level of the previous year.
The Bank of Finland measures total risk exposure on the balance sheet using well established statistical methods. In measuring the risk arising from monetary policy, the Bank of Finland uses internal risk reporting produced by the ECB, which is subject to ongoing development by the Eurosystem’s Risk Management Committee.
As an estimate of total risk, the Bank of Finland uses a figure representing the loss that would occur in the following year with a probability of 1% (expected shortfall at a 99% confidence level).
The risk estimate is supplemented with stress tests that assess losses which could be incurred under possible, though improbable, scenarios.
At the end of 2024, the total risk estimate was EUR 2.8 billion. This figure does not include the gold price risk, as the gold revaluation account covers a significant decline in value. If the gold price risk is included, the total risk estimate is EUR 2.8 billion as well.
At the end of 2024, the Bank of Finland had revaluation accounts totalling EUR 1.5 billion and provisions totalling EUR 3.0 billion available to cover losses. The primary capital and reserve fund amounted to EUR 2.9 billion (Chart 24).
Risk buffers were reduced by the negative operating profit resulting from high financing costs, but were increased by the rise in value of investments. The gold sales carried out in the fourth quarter also increased risk buffers, which do not include the gold revaluation account. The combined effect of all of these factors was that the year-end risk buffers were near the previous year’s level.
The Bank of Finland’s capital adequacy is sufficient to cover the risks arising from the performance of its tasks (Chart 25).
